* Govt has rejected call for coastal strip to break away
* Judges say the ban was unconstitutional
* Unclear if the state would appeal the ruling
By Joseph Akwiri
MOMBASA, Kenya, July 25 (Reuters) - Kenya's High Court lifted a ban on Wednesday on a separatist group demanding the secession of the country's coastal strip and famed tourist haven, the latest twist in a dispute that has unnerved investors and raised fears of violence.
The Mombasa Republican Council (MRC) was outlawed by the Kenyan government in 2010 along with 33 entities described as "organised criminal groups", but a Mombasa-based court ruled that the ban was unconstitutional.
The ruling could pave the way for talks between the movement and the Kenyan government, which has said it would not negotiate with an outlawed group.
Hundreds of MRC supporters marched in the streets on Mombasa city, Kenya's second largest, waving twigs and shouting 'Pwani si Kenya' or 'The Coast is not Kenya' after the group won its case to reverse the ban on its activities.
In its ruling, the three-judge court said there was no evidence that the group had engaged in any criminal activity, and that the MRC, like any other Kenyans, have all rights under the law including that to promote an agenda that included secession.
Justice Francis Tuiyot, however, stressed that any agitation for secession must be expressed in a fair and democratic manner - and in no way incite war, violence or hate speech.
He said the MRC should be registered as a political party, and that the court's decision should not be seen as an endorsement of secession.
"The court has been able to deduce that MRC is a political movement. Secession is a political agenda. The court therefore grants MRC a chance to enjoy their political right. They should organise and register as a political party," Tuiyot said.
It was not clear if the state would appeal the ruling.
President Mwai Kibaki has flatly rejected the MRC demand for secession, refusing any negotiations on this point. Other grievances r a ised by the group include the lack of jobs and land for the indigenous people of the coast.
The MRC chairman has said his supporters would boycott and disrupt voting on the coast in national elections scheduled for March 2013 if the group's demand for secession is not met by authorities in the capital, Nairobi.
Analysts fear this could turn the tourist haven - with its sandy beaches and pristine waters a jewel in the East African nation's economy - into a potential flashpoint, fuelling wider fears of ethnic violence and riots during the elections.
"The ruling will ease the tension. Both sides now need to talk," said Mzalendo Kibunjia, who heads a national agency formed to reconcile tribes after post-election violence in 2007 killed more than 1,200 people.
The MRC spokesman, Mohamed Mraja, welcomed the ruling.
"This is a wonderful Ramadan gift for all of us," Mraja, clad in a Muslim cap and flowing white robe, told reporters. The holy fasting month of Ramadan is currently under way.
Mraja said he would circulate copies of the ruling to all police stations and courts around the coast, where he said more than 200 of the group's members were being held on charges of belonging to an illegal group, so that they can be released.
About 100 police officers in helmets and armed with clubs and teargas canisters kept a close watch on the chanting demonstrators, shepherding them through traffic in the busy streets.
Many demonstrators had walked from far-flung corners of the coast region to hear the ruling.
"I am so excited. People back home are already celebrating," said Nuru Kadzo, a 32-year-old housewife who said she had travelled from the town of Hola 400 km (250 miles) away. "Today I will break my fast with a lot of joy."
MRC says it has documents of what it says is a 1963 accord signed by then-Kenyan Prime Minister Jomo Kenyatta, later the country's president, and his Zanzibar counterpart Mohamed Shante, granting Kenya a 50-year lease over the coast. This would expire in June 2013, when the land should return to its indigenous people, the MRC argues.
But the Kenyan government and historians in Nairobi have dismissed the treaty as a forgery and MRC propaganda. (Writing by James Macharia; Editing by Alessandra Rizzo)